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International Economic Week in Review: Declining Trade a Worrying Sign

     This week, the WTO joined the OECD and EU in warning about declining trade:

World trade will grow more slowly than expected in 2016, expanding by just 1.7%, well below the April forecast of 2.8%, according to the latest WTO estimates. The forecast for 2017 has also been revised, with trade now expected to grow between 1.8% and 3.1%, down from 3.6% previously. With expected global GDP growth of 2.2% in 2016, this year would mark the slowest pace of trade and output growth since the financial crisis of 2009.

The release contained the following two charts:

Like the OECD and EU, the WTO cited a growing protectionism as a primary cause.  Concern is warranted anytime an analyst states the current situation is the “slowest since the Great Recession.” 

     BOJ head Kuroda get a speech evaluating the BOJs QE program while also explaining its new policy.  The speech contained several important observations, starting with these two:

The first point is that, during the three years since the introduction of QQE, Japan’s economic activity and prices, as well as financial conditions, have improved substantially, and Japan’s economy is no longer in deflation. The second point is that, despite such a positive turnaround, the price stability target of 2 percent has not been achieved.

Kuroda and the BOJ clearly hoped that increased corporate profits and low unemployment would lead to increased spending.  But that didn’t occur.  Retail sales declined on a Y/Y basis in 9 of the last 12 months while capital investment barely budged over the last 1 ½ years.  Kuroda links this weak spending activity with another indicator; inflation remains below the bank’s 2% target.  Later in the speech, Kuroda brings these two items together:

The key reason lies in developments in inflation expectations.  In Japan, the view that prices will not increase — the so-called deflationary mindset — has been entrenched among people under prolonged deflation. In this situation, it has been rational for individual economic entities to maintain the status quo by hoarding cash rather than taking risks.   

Despite increased profits and wages (base pay increased for each of the last three years), people are hoarding cash.  To reverse this trend, Kuroda argues the BOJ must be “responsibly irresponsible,” which explains why they will now overshoot their 2% inflation target.   By accepting higher inflation for an extended time, the bank hopes that consumers and businesses will get out of their deflationary mindset and start spending more aggressively.

     ECB head Draghi also spoke this week.  He presented the following observations of the EU economy:

On the positive side, incoming information continues to point to the euro area economy being resilient to global and political uncertainty, notably following the UK referendum outcome. The initial impact of the vote has been contained and the strong financial market reactions, such as equity price falls, have largely reversed.

At the same time, the substantial weakening of the foreign demand outlook since June is expected to dampen export growth. Along with other factors, it will continue to pose downside risks to the euro area’s growth prospects. According to the September ECB staff macroeconomic projections, annual real GDP growth is expected to increase by 1.7% this year, and by 1.6% in each of the next two years.

Recent information from Markit supports the first assertion: the manufacturing reading was 52.6 and services was 52.1, which leads to a 52.6 composite reading.  This is consistent with recent levels of EU growth.  At the same time, global demand is declining, lowering global trade.  Exports have consistently helped the EU; a weaker global demand environment is obviously EU negative. 

     There were 2 other pieces of EU news this week.  Inflation rose .4%; core increased .8%.  Energy prices were still the primary drag on price appreciation.  Unemployment was 10.1% for the 4th consecutive month.  Of the big 4 EU economies, France was the clear problem; its rate of unemployment increased from 9.9%-10.5% in 4 months.  That’s unacceptable and concerning.  The unemployment rate in the 3 other large economies (German, Italy and Spain) is either stable or shrinking.

     Canada reported M/M GDP Growth of .5%.  The report’s best news came from the mining sectors, which increased a 2nd consecutive month, this time by 3.9%.  All other economic sectors save construction grew. 

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